Entrepreneurs who start and build new businesses are more celebrated than studied. They embody, in the popular imagination and in the eyes of some scholars, the virtues of “boldness, ingenuity, leadership, persistence and determination but policy makers see them as crucial source of employment and productivity growth; our systematic knowledge of how entrepreneurs start and grow their businesses is limited, since the activity does not occupy a prominent place in the study of business and economics because laments about the ineffable nature of entrepreneurship dominate the discourse about new and fledging businesses.
Most new business lack any ideas or assets that differentiate them from their competitors, they don’t really earn profit; they merely provide a wage to their proprietors that is set by a competitive market for the proprietor’s labor, and for many individuals this wage turns out to be lower than what they could make working for someone else, and therefore, they have a powerful incentive to shut down.
Most entrepreneurs agree that their businesses generates a positive cash flow within months of launch and the profitability of their businesses is difficult to estimate; small firms often keep inaccurate financial records and commingle company and personal expenditures.
The capacities of the incorporated companies finance their high rates of growth through internal generated funds suggesting that their profit margins are significantly positive. The belief that many entrepreneurs are special has widespread appeal, but we cannot easily specify their exact distinctive traits and skills but folklore attributes some of the many qualities of the entrepreneur as; great energy, vision, leadership skills, and lastly a never-say-die spirit, to name just a few. In addition formal research on entrepreneurs, also assumes as individuals with distinctive traits and skills, but contrastingly empirical studies provide weak support, in “profiling the entrepreneur’s personality” (Adler, 1999).
Although, the studies have suffered from basic methodological problems, for instance, many researchers have tried to identify a universal entrepreneurial personality where they have implicitly assumed that owners of the car dealerships, self-employed accountants and the founders of software companies share common traits that distinguish them from the population at large, but this seems unlikely, given the wide variety of problems and tasks that these individuals face; a related problem also is derived from the arbitrary selection of traits, and consequently researchers have studied whether entrepreneurs have ‘Type A’ personalities or a high speed for achievement, without specifying why these qualities matter.
In business theories and models studies, most businesses mature gradually and only exceptional business start with talent, capital and strategies that will rapidly propel them into the ranks of large well established companies. Fledging businesses turn into long-lived companies through a protracted, multistage process rather than through a one-short transformation. It requires decades of sustained investment to develop the necessary systems of coordinated assets, since, developing the assets that will sustain a long-lived firm requires much more investment than does when starting a promising business. This therefore implies that entrepreneurs have to undertake initiatives that require considerable out of-pocket outlays or opportunity costs to develop brand names, technologies, broad product lines, and distribution channels.
Entrepreneurs cannot easily envision the design of an effective system of complementary assets in advance. For example the distinctive features of the Wal-mart discount chain is its focus on underserved rural areas, low prices, purchasing skills, investments in information technology, employee culture and the greater store entrances; all these have an impressive logic and coherence. The Wal-Mart system evolved over more than a decade, after much trial and error and some failed initiatives, rather than through the execution of a master plan (Ballard, & Langrehr, 1993).
Learning by doing
Some critical assets like the know-how technique and reputations can only be developed through repeated action. Firms build relationship with customers by consistently providing high-quality service and products. They develop valuable brand names and distribution capabilities after decades of effort and investment. Therefore, the evolution of coordination mechanism follows the gradual development of assets.
The mainstream economic theories has little to tell us about how and why some firms survive and grow and others do not; since in the standard microeconomic theory where it focuses on perfect competition among many identical competitors, the question of survival does not arise. Although variations in the size and longevity of firms have no influence on outcomes, and the evolution of a specific firm is irrelevant; it makes little difference in this theory whether changes in characteristics are treated as altering the existing firm or were able to implement early were rewarded with growth in output and value; the others joined a mass exodus (Bielski, 2007).
In the life-cycle models; or ‘stages of growth’ or life cycle models often predictions on how firms develop as well as advice to entrepreneurs on nurturing their new ventures. The models recognize that businesses evolve in a gradual way; The Ford Motor Company and General Motors, which came to dominate the US automobile industry, evolved in markedly different ways. Ford’s evolution reflects founder Henry Ford’s engineering and manufacturing interests.
It was produced on a moving assembly line, with machines specialized for minute tasks and extreme division of labor. The system of mass production of a single standardized productivity yielded cost savings, which allowed for low prices, which in turn helped expand consumer demand. Ford Motor Company grew by replicating this system in even larger and more vertically integrated facilities.
The survival of such businesses depends more on effective adaptation to unexpected problems and opportunities than on the entrepreneur’s ability to formulate and implement a strategy. This therefore means long-term strategies do play an important role in the management of large corporations. Entrepreneurs who build long-lived firms establish audacious goals for their companies. For the founders of promising businesses may have a far-reaching vision, but it is not necessary for starting their ventures.
These goals help entrepreneurs build large and long-lived firms contrary to the case where fledgling businesses do not automatically undertake the initiatives and investments needed to build a system of coordinated assets according to the satisfaction principle, audacious goals must stimulate the search for these initiatives and investments.
The diversity of activities in these corporations requires the boards and top executives to delegate their control and management responsibilities to employees with the appropriate specific knowledge. The top executives do not initiate or implement many concrete proposals, but rather influence the initiatives undertaken by subordinates by formulating an overall corporate strategy and the processes for evaluating new initiative, not specific investment decisions. Instead of monitoring the implementation of every project, the board evaluated aggregate performance and the control system. For example, the board may evaluate whether the auditing function has sufficient independence from the operating managers.
There is separation of ‘management’ and ‘control by the broad policy which leads to a corresponding separation of roles for specific decisions, and this is done by instituting monitoring devices and policies boards whereby top executives can give decision making rights to subordinates whom they cannot directly supervise while protecting shareholders from abuse of these rights. For instance, a sales person or executive or brand manager who has direct knowledge of customer needs and competitive offerings may initiate proposals for a new product (BhidÉ, 2003).
It cannot be denied that, chance events often provide the spark for starting a promising business, entrepreneurs often encounter their opportunities by accident. In connection two factors also predispose some individuals to look for and take advantage of chance events; human capital and family backgrounds, and tolerance for ambiguity. In general, the transition of a fledging business into a large, well-established corporation requires a fundamental transformation rather than a simple scaling up, because of some basic differences in their attributes, since the profits of fledging businesses are derived from a few factors. Given the appropriate predisposition, what traits and skills determine an individual’s capacity to adapt to new circumstances and to secure resources on the converse the qualities do not have a material bearing on an individual’s willingness and capacity to start a promising business.
The transformation from fledging to mature firm requires protracted, purposive investment. The firms acquire a system of coordinated assets gradually, because capital constraints limit the size of individual investments and since it takes time to build customer relationship, know-how, and other such intangible assets. This process is not predestined, such as the normal development of an infant into an adult; entrepreneurs must consciously abandon the pursuit of short-term cash flow in favor of long-term investment. And although the sequent and pattern of investments are not predetermined, they are not random or opportunistic either, thus building long-lived firms involves the coordination of investments and efforts across functions and time. In specific, entrepreneurs have to adopt and articulate audacious goals and formulate a set of general rule (Bielski, 2007).
- Adler, P. S. (1999). “Hybridization of Human Resource Management at Two Toyota Transplants,” In J. Liker, M. Fruin, and P. S. Adler, eds., Remade in America: Transplanting and Transforming Japanese Management Systems. New York: Oxford University Press.
- Ballard, M., & Langrehr, F. W. (1993). What CPAs Can Learn from Wal-Mart. Journal of Accountancy, 176(5), retrieved November 21, 2007, from Questia database: www.questia.com
- BhidÉ, A. V. (2003). The Origin and Evolution of New Businesses. New York: Oxford University Press. Retrieved November 21, 2007, from Questia database: www.questia.com
- Bielski, L. (2007). Texas Growth plus Wal-Mart Locations: Wood forest National Bank ABA Banking Journal, 99(6), 42. Retrieved November 21, 2007, from Questia database: www.questia.com